Tuesday, 31 March 2009

UK unit labour costs increasing at almost 5 percent a year

Here is another data series warning us that unemployment is about to rise. It also suggests that we are still a long way from deflation.

Unit labour costs, as the name implies, measures the employment cost of producing one unit of output. Two things determine unit labour costs; the productivity of workers, and wages. In the fourth quarter of last year, this series was increasing at 4.7 percent; its fastest rate in eight years.

At a previous post pointed out, UK labour productivity turned negative towards the end of last year. However, the rapid rise in unit labour costs also highlights the fact that wages are outstripping productivity.

The extraordinarily sharp rise in unit labour costs tells us that workers have not yet bought into the deflation story. If they had, they would have expected prices to fall, and they would have moderated their wage claims. Therefore, we wouldn't have seen the sharp Q4 rise in unit labour costs.

Firms facing such a rapid increase in costs are faced with a stark choice. Either they pass these costs on to their customers in the form of higher prices, or they try to reduce costs by firing workers. In practice, firms will try both strategies.

This data neatly complements the unexpectedly high CPI data in February. In the short run at least, firms are trying to push higher labour costs onto customers in the form of higher prices.

Whether they can sustain this cost price inflationary push remains to be seen. What is clear, however, is that the labour market hasn't yet received the memo from the monetary policy committee on deflation.


Chris said...

There is a third thing employers can say: "we cannot give you a pay raise in this environment". There is an interesting graph in this link about worker productivity (this link is a bit old as it was written October 29, 2008) in the US for the past 30 years.

Anonymous said...

If they had, they would have expected prices to fall, and they would have moderated their wage claims.

How can you "moderate" your wage claim when:

1) Management raises their wages by double-digit percentages even though the business they run goes in the shitter.

2) The taxes you MUST pay and the things you MUST buy (food, energy, transportation, e.t.c.) goes up faster than your sucky salary.

3) In case of "we cannot give you a pay raise in this environment" the workers can decide to do shoddy work, steal more and be sick more often - to compensate. Yeah - you will get fired eventually but it's just a McJob anyhow, not a life.

Anonymous said...

If you reduce your staffing levels and your overheads remain the same then your Unit Labour costs will rise.

Alice Cook said...

anon 18:09

Not quite. Fewer workers means a lower wage bill. If you produced the same output with fewer workers then your unit labour costs would go down.


Anonymous said...

Really good companies should actually embrace the drop in productivity.....

Before sacking people, why not take some people off teams so an individual team has restored its productivity, and then use that 'spare mantime' for R&D, or other endeavours with a longer term outlook.

Or, similar idea but do something like google and allow people 20% of there work time to work on 'long term' projects.

When you sack someone, you might? save cash, but you are also losing a knowledgeable employee that knows YOUR business.

I bet every company out there has a least 1 employee with amazing ideas that would make big improvements on the bottom line / customer base given half the chance.

Sadly, I suspect most UK employee's are getting very bored at work, with too much time on there hands worrying about being sacked and feeling very helpless. WHAT A TOTAL WASTE of great people (and money)

Anonymous said...

Worth making the distinction that you can have deflation (asset) and inflation (price), at the same time.

It's a lose/lose combo!

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